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The price of calls that pay out if the stock gains 10 percent reached the highest level in six years compared with puts conveying the right to sell the shares, signaling an increase in bets that the stock will rise. Walgreen, which owns more than 8,500 pharmacies operating in every U.S. state, has rallied 16 percent in 2014 and reached the highest price since at least 1980 earlier this week.

Walgreen's partnership with AmerisourceBergen Corp. and its controlling stake in Alliance Boots GmbH will help to reduce distribution costs, increase sales of specialty drugs, and improve profit margins, according to Johan Utterman, who manages Lombard Odier Investment Managers' $422 million Golden Age Fund. Same-store sales may also begin to rebound as the U.S. economic recovery accelerates, he added.

"It's all about size and scale," Utterman said by phone from Zurich on March 5. "The bigger these drug retailers are, the better price they can extract. They can deal with fewer suppliers and -- in return for higher volumes -- both generic and branded drug manufacturers will offer them lower prices. It's a win-win for the big players."

Alliance Boots

Walgreen bought 45 percent of Alliance Boots in August 2012, giving it the option to acquire the rest of Europe's largest pharmacy chain within three years. Combined synergies from closer integration with Alliance Boots, which is also a wholesaler, generated $107 million for Walgreen in the first quarter of its financial year, according to a Dec. 20 statement.

Under a 10-year partnership that began in September last year, AmerisourceBergen supplies Walgreen's stores with branded and generic drugs. The deal also gave Walgreen and Alliance Boots the right to buy as much as 7 percent of AmerisourceBergen's equity in the open market.

Walgreen said on Dec. 20 that the number of customers at drugstores open at least 12 months increased 0.2 percent in the three months through November and their average spending rose. That ended six consecutive quarters of declining customer traffic. The retailer projected that Alliance Boots would add 7 to 8 cents per share to the company's adjusted earnings in the three months through February. Walgreen reports earnings for the second quarter of its financial year on March 25.

Emily Hartwig, a spokeswoman for Walgreen, said the company would not comment on the options trading.

Supply Chains

Streamlining Walgreen's supply chain may take more time and generate fewer savings than option traders predict, according to Judson Clark at Edward Jones & Co. He has had a hold recommendation on the stock since 2012 and says Walgreen's high valuation makes other drug retailers more attractive. The stock trades at about 19 times its projected earnings, near the most expensive level since 2007 and greater than CVS Caremark Corp.'s multiple of 16.4, data compiled by Bloomberg show.

"I see some execution risk with Walgreen," Clark said by phone from St. Louis on March 5. "There's just a lot of moving pieces and investors are betting that everything will just click into place. I don't think this reflects the risk that they won't realize the cost savings in the timeliness and magnitude that investors are hoping for. There's more to like in the CVS Caremark story."

Projected Earnings

Walgreen may report this month that quarterly adjusted earnings fell to 93.7 cents a share from last year's 96 cents per share, according to the average of analysts' estimates compiled by Bloomberg. Analysts project gross profit margin will slip 0.7 percentage points to 29.4 percent of sales in the period, data compiled by Bloomberg show. Walgreen said on Dec. 20 that promotions aimed at attracting more shoppers lowered profit margins during the first quarter of its financial year.

Still, options traders have been increasing bullish bets on Walgreen. Calls that pay out if the stock rises 10 percent cost 1.47 points less than puts betting on a 10 percent decrease on Feb. 21, the least since December 2007. The price relationship known as skew stood at 1.9 points on March 6, according to three-month data compiled by Bloomberg.

The number of outstanding calls to buy the stock rose to 278,275 on March 5, near the highest since July 2012, data compiled by Bloomberg show. That compares with 223,813 puts.

VIX, VStoxx

Implied volatility, used to gauge the price of options, for three-month contracts with an exercise price 10 percent below Walgreen shares has dropped 11 percent from its June 2013 high to 28.63, according to data compiled by Bloomberg. The measure for calls slid 1.3 percent to 26.73 since the same date.

The options market is implying a one-day stock move of 4.2 percent after the earnings release, more than the average 3.8 percent gain or drop following the last eight releases.

"Walgreen is very well positioned to provide customers with more than just prescription filling and expand into areas like vaccinations and beauty," Alison Porter, who helps oversee about $113 billion at Ignis Asset Management in Glasgow, said on Feb. 28. "We are bullish on the drugstores and have quite a lot of exposure in our funds."

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